On May 19, 2014, we issued an updated research report on
Gentiva Health Services Inc.
). The company's inorganic growth strategies and expense reduction
initiatives position it to generate growth going forward. However,
we remain concerned about the waning cash flow level and effect of
the changes introduced by the Centers for Medicare & Medicaid
Earlier, Gentiva reported first-quarter 2014 earnings that
surpassed the Zacks Consensus Estimate. However, the company's
operations were disrupted by a severe winter, as a result of which
earnings declined year over year.
Gentiva has been growing inorganically over the years to expand its
operating leverage. In recent times, the acquisition of Harden
Healthcare has been of importance as it boosted episodic
admissions. Gentiva is also operating in two non-Harden community
care sites in North Carolina, which have scope for further
expansion. Moreover, the company expects to continue its
acquisition spree in hospice and home health to improve its market
density, provide quality service and exhibit long-term growth.
Apart from acquisitions and divestitures, the recent rejection of
the takeover proposal made by Kindred could prove beneficial for
this Zacks Rank #3 (Hold) stock, as this may now impel the company
to tighten its financial structure and policies to gain investors'
confidence. Gentiva's focus on specialty services also remains
impressive. With the gradual increase in the ageing population,
rise in specialty programs (targeted to aid this aging population)
bodes well for margin improvement.
Gentiva remains focused in its cost containment initiatives. The
company began reducing direct expenses since the fourth quarter of
2013 pertaining to the drop in average daily patient census. This
was continued through the first quarter of 2014 as well, leading to
a sequential margin improvement. Growth in margins is expected to
continue through the rest of 2014 on the back of these expense
On the flip side, Sustainable Growth Rate (SGR) cuts in home health
Medicare, impact of the sequestration rate cut on Medicare-based
revenues and decline in Hospice revenues have restricted the
desired revenue growth in recent times.
Moreover, the changes proposed by the CMS for Medicare Home Health
Prospective Payment System have adversely affected Gentiva's
earnings. Additionally, as per the recent legislation introduced in
the U.S. House of Representatives, Medicare reimbursements to home
health are expected to fall further by around $200 million in 2014.
Gentiva has been facing considerable legal hassles concerning
Medicare reimbursements. Higher legal and other costs have
lowered the company's operating cash flow in the past year.
Further, adding to the financial risks, an operating cash outflow
of $17.7 billion was witnessed in the first quarter of 2014. If
operating cash flow suffers significant declines, Gentiva will be
compelled to delay its planned capital expenditures and cut short
its capital deployments going forward.
Other Stocks to Consider
Investors interested in the healthcare services space could
consider stocks like
Almost Family Inc.
) Of these, Almost Family sports a Zacks Rank #1 (Strong Buy),
while Amedisys and RadNet carry a Zacks Rank #2 (Buy).
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